Demonetisation – Political Gimmick Or Transformational Change?

Posted on November 25, 2016 in Business and Economy

By Ishan Arora:

Lately there has been a lot of buzz about demonetisation of Rs. 500 and Rs. 1000 currency notes.The expeditious announcement by Prime Minister Narendra Modi came as a shock to many. People are dumbfounded and don’t know how to react to the situation.

On one side are critics like Delhi CM Arvind Kejriwal, who are trying hard to combat this change, and on other are the Modi ‘bhakts’, who are blasting social media with words of praises for their paladin. The tension between the bhakts and the opposition parties has left many perplexed.

This has left us with a question – whether the so-called ‘surgical strike’ on black money is really a transformational change which will help the society grow in the long term’ or if it is it just a political gimmick played by the BJP to strengthen its roots in the Indian political scenario’. For this, one must analyse the pros and cons of demonetisation.

Pros Of Demonetisation

1. Decline in black money

Black money refers to the income that is illegally obtained or not declared for tax purposes. Prior to the demonetisation move, 86% of the currency by value in India comprised of Rs. 500 and Rs. 1000 denominations.  Now demonetisation would ensure that people hoarding black money are left with no option but to forfeit the amount or destroy it. This in turn will result in reduction of black money circulating in the market.

2. End to fake currency racket

As per RBI reports, in the year 2015-16, around 6.5 lakh counterfeit notes were reported in the commercial banks of which nearly 4 lakhs were in the high denomination categories of Rs. 1000 and Rs. 500. Demonetisation would mean an end (temporary at least) to the fake currency racket.

 3. Obstacle against terrorism

It is believed that terrorists use fake currency to buy arms and ammunition and to aid their terrorist activities in India. Data by the NCRB shows that in the year 2015, 1,78,022 pieces of fake Rs. 1000 notes and 2,99,524 pieces of fake Rs. 500 notes were seized by various law enforcement agencies. Hence it is of utmost importance for the security of our nation, that we control the counterfeit currency and demonetisation is one of the ways to do it.

4. Fair Elections

Political parties use a lot of black money to support their massive election campaigns. Majority of the money is kept as hard cash in secret places only to be used during the time of elections. Now, with the sudden demonetisation of currency, all the unaccounted cash would go to waste which might result in fairer elections with little money to support bribery.

Cons of Demonetisation

1. Loss of productivity

Sudden note ban by the Modi government has created a huge panic among the general masses. Small businessmen and less literate people are the ones affected the most by this decision. People are afraid of losing their hard-earned money and as a result they are even willing to stand in long queues to replace the old currency. Just imagine how many hours of work are getting wasted each day as a result of these queues.

Small businesses rely heavily on day-to-day cash transactions for payments, operating costs etc. Now that demonetisation has happened, their businesses will suffer a huge blow till the new currency is out in plenty.

2. Trouble in rural India

Rural India still has only a smattering of banks and ATMs in the vicinity. Demonetisation has resulted in people running out of food, as they are left with no money to purchase anything. This has not only forced farmers to commit suicide but has also raised questions on the strategic move by the government.

Demonetisation was done with a purpose to promote cashless transactions. But in a country like India where rural population is around 70% with very little or no access to internet, whether such a move would be viable or not is debatable.

3. Wastage of money

As a result of demonetisation, the old currency would be dumped and new currency would be printed. Now, each Rs. 1000 note and Rs. 500 note used to cost Rs. 3 and Rs. 2.5 respectively. Dumping these notes and printing the new ones would mean wasting millions of rupees of tax (which would be paid by us later).

4. Partial eradication of black money

In a corrupt nation, people who are powerful, like politicians or big corporates,would eventually find a way out to convert their hoarded cash into white money. It is the common man who lacks power, who will be irritated, burdened and imprisoned for tax swindles.

A closer look at the statistics of the black money indicates that a major chunk of it is kept in the foreign banks or is invested in gold or real estate. Demonetisation  won’t help us bring that money back into our economy.